I was going to call today. My understanding was that pre-payment penalties were based on the principal balance at the time the note would be paid off. But when you get a 35% penalty clause in a counter offer, you sit up and take notice.
I just wanted to see if anyone here knew if there were other ways to calculate this penalty and maybe that is what is being offered here.
And yes, that sounds pretty steep. If they insist on this part of it, then I can insist on my price.
No pre-payment penalty after year 7
35% pre-payment penalty in first 5 years
25% pre-payment penalty in years 6 & 7
What are pre-payment penalties based on? Can it vary depending on what is written in the contract and/or DOT (mortgage)?
A counter offer to me was including the above terms and this is all verbal at this point with our discussions. I just wanted to set my mind straight on how pre-payment penalties are calculated and what it could mean to me as a buyer. I am not objecting to a pre-payment penalty at this point, but I also don’t want it to be unbearable or a hinderance should times change later and I want to re-finance to pay off the underlying note.
That seems very high to me. The highest i have delt with is a 6 month interest penalty, which is about 4%. You never know when you situation may change and you may have to sell. Persoanally, i look at a worst case scenario if i have to sell. Will i still have a profit if i have to pay the penalty? If not i don’t do the deal. Just my 2 cents.
If the laws limit pre-payment penalties, build the maximum penalty rate into the deal, agree with the seller to the terms you’ve listed above.
Then, later, if you want to pre-pay, you can let the seller know that your attorney discovered an error in the contract and that, by law, the most you can pay them is (x%).
Fighting greed with good information is fun, isn’t it?
They make it up or pick it out of the air. Whatever they can get away with that will give them a future advantage for nothing.
That must be at least a 10 year term. Short term mortgages have no prepayment penalties.
By the way if you wanted to prepay I don’t know why you couldn’t arrange another mortgage then violate the DOS and have them call the mortgage due, then you could pay it off with no penalty. I have suggested this before and no one has said it wouldn’t work.
As far as I know there is no set or standard rate for a prepayment penalty, they can be any amount agreed upon. Is that 35%/25% of the principal? If so that sounds pretty steep to me.
Posted by Mark-WV on January 14, 2003 at 20:56:42:
Hello Tim,
Here prepayment penalty’s are based on the loan amount at close. There is a state law however that limits the penalty to 1% of the loan so it can’t hurt you to bad. Might have a limit there also ,it’s worth checking on.
I will probably use that as a come back to the seller. That law prohibits anything above xx% so we can’t do that.
I think the goal here is that the seller doesn’t want cash at one big time, so a penalty for early payoff is to be used for some kind of tax hit the seller may get by taking cash early. Just a guess at this stage, but the percentages make it look like that.
The big sticking point is getting them to call it due. I tried that once on a loan with Homecomings Financial and they wouldn’t call it due. It had a 6 month interest prepayment penalty and around a 10% interest rate. I called and wrote letters and they didn’t care. You pretty much have to be behind in payments, which i wasn’t, for them to care.
